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Assessing the Impact of Limiting Indonesian Palm Oil Exports to the European Union Rifn et al. Economic Structures (2020) 9:26 https://doi.org/10.1186/s40008-020-00202-8 RESEARCH Open Access Assessing the impact of limiting Indonesian palm oil exports to the European Union Amzul Rifn*, Feryanto, Herawati and Harianto *Correspondence: [email protected] Abstract Department of Agribusiness, The latest challenge faced by the Indonesian palm oil industry concerns the Delegated Faculty of Economics and Management, Bogor Act that has been adopted to limit the use of palm oil in biofuels because palm oil is Agricultural University, Bogor, considered to not support the sustainable development program. The objective of Indonesia this article is to assess the suspension of Indonesia’s palm exports to the European Union in terms of Indonesia’s economic conditions. The Global Trade Analysis Project (GTAP) model is used to assess the impact, and the results indicate that the suspension will not create signifcant impacts on the economic growth, GDP, macro-welfare, and exports and imports of Indonesia. Keywords: Palm oil, European Union, Import 1 Introduction Indonesian exports reached US$ 168.8 billion in 2017, an increase of 16.8% compared to the previous year (UN Comtrade 2018). One of the largest contributors to these exports is palm oil, amounting to 13.6% in 2017. Indonesian palm oil exports in 2017 reached US$ 22.97 billion, an increase of 26% compared to the value in 2016 (UN Comtrade 2018). In 2017, Indonesia exported approximately 29 million tons of palm oil, with the largest destination countries including India, with a market share of 25.37%; followed by the European Union, with 14.35%; and China, with 12.39% (UN Comtrade 2018). Dif- ferent from India and China, which directly consumed its palm oil, European market besides consumed directly it also serve as a trade hub for other countries in the region (Rifn 2013). For a long time, countries of the European Union, particularly the Netherlands, have been the major market destination for Indonesian palm oil as well as being countries that connect Indonesia and other European countries. However, there have been many instances in the last several years where oil imports, mainly from Indo- nesia, have been hindered from entering European countries. Several issues, includ- ing health, environment, and animal protection, have been considered to hamper the entrance of Indonesian palm oil to Europe. Tis is confrmed by the Report on Palm Oil and Deforestation on Rainforests, which stated that palm oil is a very large prob- lem related to the issue of corruption, child labor, violation of human rights, omis- sion of the rights of indigenous people, and a trigger to deforestation and habitat © The Author(s) 2020. This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creat iveco mmons .org/licen ses/by/4.0/. Rifn et al. Economic Structures (2020) 9:26 Page 2 of 13 destruction (European Parliament 2017). One of resolutions and recommendations given is to stop Crude Palm Oil (CPO) imports (including from Indonesia) in 2021. Moreover, the framework of the Renewable Energy Directive (RED) regulates renew- able energy use in the European Union, where CPO is phased out as the source of biofuel due to its high emission level, although it is yet to be fnalized. On the other hand, the data of Indonesian palm oil exports to the European Union showed that the need and demand for Indonesian palm oil continued to increase through the years. In 2016–2017, demand for Indonesian palm oil in the European Union mar- ket increased by 15%, and during 1996–2016, palm oil consumption in the European Union increased by 31% (UN Comtrade 2018). Tis condition indicates that European Union countries necessarily need palm oil for their industry. In addition, in May 2019 the European Commission has adopted the Delegated Act to limit the use of biofuels from palm oil which has indirect land-use change (ILUC) risks. Indonesia has tried to undertake various diplomatic approaches to explain this prob- lem, yet issues regarding palm oil continue to appear and develop. Terefore, the dis- course to halt Indonesian palm oil exports to European countries ultimately prevails. By suspending Indonesian palm oil exports to European countries, Indonesia will escape criticism from many parties in Europe and can focus on developing a sustainable palm oil system based on the national law and sustainable development goals (SDGs). Based on this background, it is important to conduct a study aimed to observe and discuss the impact of palm oil export suspension to European Union on Indonesia. Several previous studies showed that palm oil has an important contribution to the Indonesian economy; therefore, disruption in this sector will afect the other sec- tors. Susila (2004) specifcally analyzed the Indonesian palm oil sector and found that it contributed to economic growth, poverty alleviation, and income distribution within society. Te contribution of the palm oil sector was shown by the growth, investment, output, and foreign exchange earnings; it has also contributed to household revenue, playing a role in increasing household assets. In terms of poverty alleviation, the palm oil sector has contributed to income distribution within the society. Te same result was obtained by Edwards (2015), who showed that expansion of palm oil’s share of land in the ten districts that experienced the largest expansion would decrease poverty rate and narrow the income gap. Edwards (2019) estimates that the palm oil industry has suc- ceeded in lifting 2.6 million rural Indonesians from poverty. At the regional level, Gatto et al. (2017) showed that contracts between smallholder palm oil farmers and private or state-owned companies signifcantly contributed to the regional economy especially at the village level in the form of infrastructure built by the companies; these not only ben- efted contract farmers but also noncontract farmers. Perwitasari and Sari (2013) analyzed the impact of palm oil to the Indonesian economy using Input–Output table. Te authors reveal that palm oil output multiplier is higher compared to the average of all sectors meanwhile the income, labor and value-added multiplier are lower compared to the average of all sectors. Susila et al. (2007) analyzed the role of the plantation industry on the growth and economic inequality using the social accounting matrix (SAM) approach. Te authors showed that the palm oil and cooking oil sectors were found to be the largest sectors contributing to economic growth, employment, and income distribution. Rifn et al. Economic Structures (2020) 9:26 Page 3 of 13 Susila and Munadi (2008) showed the impact of the development of the CPO-based biofuel industry on poverty. Te development of the CPO-based biofuel industry will decrease the number of poor people, particularly those who live around the oil palm plantation. However, the development of CPO-based biofuels will also increase the price of cooking oil consumed by poor people, thus increasing their number. At a micro-level, Rist et al. (2010) used primary data to show that small farmers will be able to gain proft through a high rate of return from land and labor by doing business in oil palm commodities. Feintrenie et al. (2010) also showed that oil palm was more ben- efcial compared to rubber and rice. A number of researchers also analyzed the impact of decreasing number of exports on the economy of Indonesia. Wibowo (2013) showed that declining exports in the min- ing and industrial sectors signifcantly impacted the absorption of labor in the agricul- tural sector despite increasing exports in the agricultural sector. Based on this scenario, an 8%increase in agricultural exports, a 9.6% decrease in the mining sector and a 4.9% decline in the industrial sector will reduce the labor absorption of 210 thousand people in agricultural sector, higher than any other sector. Te Ministry of Industry (2018) analyzed the impact of the CPO ban in the European Union market on the Indonesian economy using a computable general equilibrium (CGE) model. Te authors simulated two situations of the export ban, namely, the CPO ban causing decreased exports and the CPO ban followed by investment in economic activities downstream of the palm oil sector. In the frst simulation, the ratio between trade and GDP decreased by 0.18%, increased the real wages by 0.26%, maintained the real GDP, decreased the imports by 0.04% and decreased the exports by 0.42%. In the second simulation, the ratio of trade to GDP increased by 0.25%, increased the real wages by 0.7%, increased the real GDP by 0.42%, decreased the imports by 0.15% and increased the exports by 0.17%. In this simulation, the ban on CPO exports had posi- tive efects compared to the former since the increase in investment in the downstream industries of palm oil is assumed to eventually have a positive efect on ratio between trade and GDP as well as GDP and export. Rifn (2011), using the social accounting matrix (SAM), analyzed the impact of palm oil exports to the economic sector, production factor and household.
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